El Pollo Loco - Q4 2022

Transcript

Operator (participant)

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the El Pollo Loco Q4 2022 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, March 9, 2023. Now I would like to turn the conference over to Ira Fils, the company's Chief Financial Officer.

Ira Fils (CFO)

Thank you, operator, and good afternoon. By now you should have access to our Q4 2022 earnings release. If not, it can be found at www.elpolloloco.com in the investor relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements, including statements related to the impact of the COVID-19 pandemic and macroeconomic environment on our business as well as our marketing and new product initiatives, our strategic pillars, cash flow expectations, capital expenditure plans, remodel plans, expected new store openings, and expected income tax rate, among others.

These forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect.

We refer you to our current recent SEC filings, including our Form 10-K, for a more detailed discussion of the risks that could impact our future operating results and financial condition. We expect to file our 10-K for 2022 tomorrow and would encourage you to review that document at your earliest convenience. During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release. Now, I would like to turn it over to our President and CEO, Larry Roberts.

Larry Roberts (President and CEO)

Thanks, Ira, and good afternoon, everyone. We are pleased with our performance in the Q4 as system-wide comparable restaurant sales increased by 4.7%, including a 6.5% increase at company-owned and a 3.5% increase at our franchise locations. These results were driven by the success of our stuffed quesadilla promotion that resonated well with both new and existing customers, as well as the continued improvement in our company-owned and franchised restaurant operations. In fact, our system restaurant operations in the Q4 were the best they had been all year. Last visit excellence and social media scores reached new highs for the year while customer complaints were at their lowest levels.

The continued improvement in our restaurant operations are reflected in our brand tracker results in which we made significant progress against our competitive set across all five key attributes, which are food and menu quality, service, environment, value, and overall brand experience. Our strong results on value were especially reassuring given the year-over-year pricing at company-owned restaurants in the Q4 was 10.6%.

It again demonstrates that value is determined by more than just price, and consumers recognize the lengths we go to at El Pollo Loco to serve delicious food that is freshly prepared every day in our restaurants. Another highlight of the quarter was the opening of the first El Pollo Loco restaurant in Colorado in November. The opening set a new weekly sales record for El Pollo Loco, and the restaurant's average weekly sales are still well above expectations four months after opening.

We are very excited for our franchise partners and look forward to continued success as they, along with other franchisees, build restaurants in Colorado. While we continue to be pre-pressured by inflation, our teams did an admirable job managing their businesses, delivering a restaurant operating profit margin of 14.7%, which was 230 basis points better than the Q3, and adjusted net income earnings per share of $0.16. As we look ahead, we are excited to build upon this momentum in 2023 as we continue our focus on our four strategic pillars, which are, 1, embed our unique El Pollo Loco culture. 2, build awareness and own our lane. 3, deliver exceptional service profitably. 4, accelerate development.

Throughout 2022, we made significant progress in creating a servant-led leadership culture predicated on recognition, greater interaction with team members, and career development while still maintaining accountability. We also implemented programs to create greater support center appreciation for the work our restaurant teams do every day.

Another pillar of the culture we are building at El Pollo Loco is to provide greater support to the communities in which we operate. Along these lines, in November, we announced a new partnership with Feeding America to raise money for the Feeding America network of local food banks. Through this campaign, which runs until June 30th, El Pollo Loco aims to raise $400,000 through a limited time roundup campaign. Ultimately, 90% of the donations made through this campaign will be distributed to food banks around our restaurants in the communities we serve.

Our charitable organization, El Pollo Loco Charities, is matching the first 100,000 roundup transactions. In addition, El Pollo Loco Charities is finalizing an agreement to support a large charitable organization in Orange County, which we expect to announce shortly. While Pollo Loco Charities has existed for many years, we plan to significantly increase its fundraising capabilities in order to amplify its impact on our communities. We believe these types of initiatives reinforce the familiar culture we are building throughout our system.

Our second pillar is build awareness and own our lane. Pollo Loco is a differentiated concept founded upon our famous fire-grilled chicken and entrees, sauces and dressings that are made fresh in restaurant every day. These are served with the speed and convenience of fast food restaurants. It's food that combines our authentic Mexican roots with a culinary culture of Los Angeles.

Our strategy is to continue driving this differentiation while working to attract younger consumers to the brand through our product offerings, advertising and remodeled restaurants. A great example of this strategy was our Overstuffed Quesadillas promotion during the Q4, which included three options, one of which was beef. Overstuffed Quesadillas achieved a mix of almost 7% of total sales, with beef being the top performer. The promotion success was at least partially due to the continued use of TikTok to reach younger consumers, which achieved over 10 million views during the module. We are very encouraged by the performance of both Overstuffed Quesadillas and beef, both of which have the potential to be permanent menu items that help us attract younger consumers.

Recognizing that many consumers are increasingly budget conscious, we also focused on value offerings during the Q4 with a promotion of our $24 Family Feast and revised Fire-Grilled Combo starting at $5. Both resonated well with consumers and further highlight the need to provide value offerings to maintain frequency among budget-constrained consumers. As we enter 2023, we introduced Loco Burrito Grillers at the beginning of January and started marketing our Double Tostada Salads in late February. Both promotions included shredded beef options as we continue to test our way to permanently serving shredded beef at our restaurants. Our Loco Burrito Grillers are handheld and come with Loco Dipping Sauce comprised of cheese and a special consommé.

While this is our 3rd consecutive year promoting tostadas, we continue to see incremental growth of this platform, and with a pre-promotion sales mix of about 13.5%, it is now our highest selling non chicken on the bone menu item. Adding a shredded beef option enables us to pair a fan favorite with a continued development of shredded beef on our menu. To further enhance our value offerings, in addition to our $24 Family Feast and Fire-Grilled Combos starting at $5, we will be introducing 3 Pollo Bowls priced at $5 beginning in late March. These screen well with consumers, and we believe they resonate well with cost-conscious consumers while providing attractive margins.

While menu innovation continues to be a key element to our brand, we're implementing several initiatives this year to further differentiate our unique offerings as well as broaden our consumer base. First, we've hired a new creative agency, Organic, who are tasked with building awareness and driving our differentiation by bringing a fresh look and new energy to our advertising across all media channels. This new approach recently debuted with our current tostada promotion. Second, in April, we will be launching a completely revamped app and loyalty program.

These upgrades will make it significantly easier for consumers to order food from us, and our loyalty program will provide additional options for engagement and food redemption. Third, we are evaluating our menu approach with a menu board test that will include an add-on panel to drive higher check and product platforms like Overstuffed Quesadillas.

Over time, we believe we can drive more sales by building on past product successes and structuring the menu towards permanent platforms versus 6-8 week limited-time offerings. We believe desserts and catering present significant opportunities for incremental sales that we have not aggressively pursued. As a result of many businesses returning to work and group gatherings increasing, we've decided to revamp our catering offerings to adjust to the evolving landscape of the way consumers eat in groups. We are committed to developing a robust catering program that we believe has the potential to drive significant incremental sales. While still early in the process, we are excited for the catering opportunities ahead and will update you as the year progresses. That brings us to our third pillar: deliver exceptional service profitably.

Throughout 2022, our teams worked hard to properly staff our restaurants and train our team members. We've been reaping the benefits of these efforts. Crew member turnover during the Q4 was down to 100% and 93% of our company-owned restaurants were fully staffed. All company-operated restaurants are able to open all sales channels for all operating hours. As highlighted earlier, during the Q4, we continued to see improvement in company and franchise-operated restaurants' drive-through times, last visit excellence scores, social media ratings, customer complaints, and value scores. These metrics have continued to improve during 2023. This is not to say that we don't have pockets of challenged restaurants, but overall, the system is operating at high levels, which we believe will drive increased sales.

With staffing challenges largely behind us and the significant improvement in company-owned restaurant operations, in 2023, we are expanding our operations focus to include bench building, enhanced training, and cost management. We believe that the key to building sustainable, consistent restaurant operations is through the development of restaurant leader bench, including area managers, general managers, assistant managers, and shift leaders. To that end, we have put a renewed focus on leadership development, not only to benefit our current restaurant base, but also to ensure we have the leaders necessary for the continued growth of the El Pollo Loco brand.

In addition to leadership development, at the team member level, we've completed the rollout of an enhanced e-learning platform across the system. This will not only improve the training our team members receive, but enable us to attract completion of the various modules, thereby ensuring employees are certified for the positions they are working. With improved staffing levels and customer service at company-operated restaurants, we are now increasing our focus on better managing labor and food costs. This includes minimizing overtime, meal break penalties, staffing inefficiencies, and food waste. I am pleased to say that we're already making good progress against these since the start of the year. Simplifying our operations remains a top priority, and we're building upon the work we did last year by implementing several initiatives geared for reducing complexity and improving product quality.

Soak tanks for cleaning grill filters and broilers will be implemented in company-owned restaurants by May and throughout the system this summer. A simplified new employee onboarding process will be rolled out to company-owned restaurants in May, and we are revamping our operations manuals with a targeted rollout this summer. In addition to these, we continue to work to simplify the menu, reduce the time it takes to prepare salsa, and are testing dishwashers and ordering kiosks.

We are excited by the progress we're making to simplify operations, and it remains an area of huge opportunity. Let's now turn to our last pillar, accelerate development. While I expect to continue developing four to six company-owned restaurants annually in our core markets, accelerating development will depend on franchisees, both new and existing, and will require us to successfully enter new markets.

To execute this strategy, as we highlighted on our calls last year, we greatly enhanced our franchise recruiting efforts. These efforts have resulted in dramatic increases in inquiries and prospects who meet our investment criteria. During the Q4, we signed a development agreement with a new franchise group to open 8 restaurants in the Kansas City area. This brought us to 5 new development agreements for a total of 25 restaurants. In addition, as mentioned earlier, our franchise partner successfully opened our first restaurant in Denver market, which we believe is a great example of the success our franchisees can have in new markets driven by the strength of the El Pollo Loco brand. We continue to work on a number of franchise development agreements and look forward to announcing additional partnerships as we progress through 2023.

In summary, while unfavorable weather is proving to be a headwind in early 2023, we are excited about the prospects of El Pollo Loco this year. Our restaurant operations are as good as they have ever been and will continue to get even better. This is aided by the culture we are building throughout the El Pollo Loco system, which is focused on recognition, engagement, leadership development, and supporting our communities.

Our brand positioning is clear. In addition to strong marketing calendar, we are implementing several other sales-driving initiatives that will further differentiate our brand and drive awareness with younger consumers. Finally, efforts to attract new franchisees to El Pollo Loco system are paying dividends. We are on our way to accelerating new unit development. We remain confident that our focus on the four strategic pillars is successfully positioning us for success for years to come.

I'd like to thank each member of the familia, including all our team members and franchisees, for their hard work and dedication in making El Pollo Loco truly special. With that, let me turn the call over to Ira for a more detailed discussion of our Q4 financial results.

Ira Fils (CFO)

Thank you, Larry, and good afternoon, everyone. For the Q4 ended December 28, 2022, total revenue increased 6.4% to $115.9 million, compared to $109 million in the Q4 of 2021. Company-operated restaurant revenue increased 6.4% to $99.6 million from $93.6 million in the same period last year. The increase in company-operated restaurant sales was primarily driven by a 6.5% increase in company-operated comparable restaurant sales. The increase was comprised of a 7.3% increase in average check size, partially offset by a 0.8% decrease in transactions. During the Q4, our effective price increase versus 2021 was a little over 10.5%.

Looking ahead, including our quarter to date results, we are currently expecting Q1 2023 system-wide comparable restaurant sales to increase 0.5%-1.5%, inclusive of a company comparable restaurant sales increase of 3%-4%. Our sales expectations reflect the negative impact of adverse weather conditions experienced in California and other Western markets during the Q1 of 2023. In addition, the last two weeks of the quarter will be rolling over our incredibly successful Beef Birria promotion in the prior year. Franchise revenue was $9.4 million during the Q4, compared to $8.8 million in the prior year period.

This increase was driven by a franchise comparable restaurant sales increase of 3.5%, as well as the opening of 11 new franchise restaurants opening during or subsequent to the Q4 of 2021, and revenue generated from 3 company-owned restaurants sold to an existing franchisee during the Q4 of 2022. This was partially offset by the closure of 2 franchise restaurants during or subsequent to the Q4 of 2021. Turning to expenses. Food and paper costs as a percentage of company restaurant sales increased 110 basis points year-over-year to 28.3% due to increased commodity costs, partially offset by higher menu prices. Commodity inflation during the Q4 was approximately 16% and did moderate from a high of 23% during the Q3 of 2022.

We continue to expect commodity inflation to decelerate to be between 3%-5% for 2023. Labor and related expenses as a percentage of company restaurant sales decreased 40 basis points year-over-year to 31.9% as wage increases were offset by higher menu prices and lower overtime expense as staffing levels continue to improve. Labor inflation during the Q4 was approximately 8%. We continue to expect wage inflation of 4%-6% for 2023. Occupancy and other operating expenses as a percentage of company restaurant sales increased 20 basis points year-over-year to 25% due to higher utilities and insurance expense. Our restaurant contribution margin for the Q4 was 14.7% compared to 12.4% in the Q3 of the year.

Looking into 2023, we expect restaurant contribution margin to be in the mid-teens. General and administrative expenses improved 40 basis points year-over-year to 8.3% of total revenue as we gain leverage on the 6.4% revenue increase. Increases in legal settlement expense, recruiting expenses, and other general and administrative expenses were offset by a decrease in labor related costs, primarily related to lower incentive compensation. We recorded a provision for income taxes of $2.3 million in the Q4 of 2022 for an effective tax rate of 26.4%. This compares to a provision for income taxes of $1.7 million and an effective tax rate of 21.5% in the prior year Q4.

We reported GAAP net income of $6.5 million or $0.18 per diluted share in the Q4 compared to GAAP net income of $6.2 million or $0.17 per diluted share in the prior year period. Adjusted net income for the quarter was $6 million or $0.16 per diluted share compared to adjusted net income of $6.1 million or $0.17 per diluted share in the Q4 of last year. Please refer to our earnings release for a reconciliation of non-GAAP measures. Regarding development, during the Q4, one new company restaurant was opened and two new franchise locations were opened. The one new company opening was in Las Vegas. One of the new franchise locations was in Colorado, and the other new franchise location was in Utah.

For the full year of 2022, we opened a total of 4 new company restaurants and 9 new franchise restaurants. During the Q4, we remodeled 2 company restaurants and 8 franchise restaurants, which brings our completed remodels for the year to 6 company and 16 franchise remodels. Looking into 2023, we expect to complete 10-15 company remodels and 20-30 franchise remodels. Turning to liquidity, as of December 28, 2022, we had $66 million of debt outstanding and $20.5 million in cash and cash equivalents. Subsequent to the end of the quarter, we paid down $8 million on our 2022 Revolver, and as of March 9, 2023, our outstanding borrowings were $58 million. Turning to our 2023 outlook, we are providing the following guidance items.

The opening of 4-6 company-owned restaurants and 8-12 franchise restaurants. Capital spending of $27 million-$31 million and G&A expenses between $42 million and $45 million. An adjusted income tax rate of 26.5%. This concludes our prepared remarks. We'd like to thank you again for joining us on the call today, and we are happy to answer any questions that you may have. Operator, please open the line for questions.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your questions. Our first question comes from the line of Drew North with Baird. Please proceed with your questions.

Drew North (Equity Research Analyst)

Good afternoon. Thanks for taking the question. My first one was just on Q1. I was wondering if you would be able to give some estimate about the weather impact for the Q1, so that we can gauge the underlying trend, at least in the quarter to date period.

Larry Roberts (President and CEO)

Sure. Thanks, Drew. I'll probably give you a little bit more on top of that. First, I'll start by highlighting that as we talked about earlier in the year, that we really saw good momentum coming out of 2022, when we saw, ow, really for the quarter, strong comps and actually comps had been improving from

Month-to-month starting in October, November, December, each month got stronger. We really felt like we were heading into the new year with pretty strong momentum. If we now look at where we are quarter-to-date, really company comp sales are up, a little over 6%. Franchisees are thinking right around, half a percent positive. Which is actually pretty strong given we're estimating that the weather impact is probably in the range of 2%-4% in terms of same-store sales growth. That's really, rain and on top of, cold weather during the quarter.

Again, when look quarter to date, we feel like, the trends we saw in the Q4 have continued in the Q1. Unfortunately, the weather has knocked us back a bit, but from a quarter date perspective, the comps are pretty good even despite the weather. As Ira highlighted in his comments, with the lap of Birria coming up over the last couple of weeks of the quarter, that's going to bring the comp growth down for the quarter.

Drew North (Equity Research Analyst)

Great. That's very helpful. Thanks for all the color. One follow-up on the comp. I guess, how are you looking at the comparison as we get to Q2, especially amid the successful Beef Birria promotion last year? I just wanted to get your sense or your level of confidence in your ability to cycle that period with sustaining positive comps against tough comparisons there.

Larry Roberts (President and CEO)

We feel like we'll be able to drive positive comps. I mean, because what will happen is during the beginning of the quarter, we'll be lapping Birria from last year, but then we're also doing a Birria promotion during the Q2. You've got a little offset in terms of lap. I mean, Birria started earlier last year as our second module. This year is our third module. There's a bit of a timing disconnect, but, you should see early in the quarter, lapping Birria from last year. That will be a uphill battle on the comps. As later in the quarter, we should start seeing that turn more favorable because we'll be launching Birria versus, last year when we were on to something besides Birria.

Drew North (Equity Research Analyst)

Perfect. Just one more from me here, related to unit growth. Given a key component of the strategy from here is to fuel franchise-led development, I was hoping you could provide some color on where franchise-level profitability or cash flow sits today, maybe how that compares to last year, or 2021, or even pre-COVID. Perhaps just higher level, any additional insights into how the conversations are going with franchisees and the sentiment there as you look to get back to 5% unit growth in the out years.

Larry Roberts (President and CEO)

Yeah. No, I don't, I mean, I've seen some franchise, profit and loss statements. I don't see them all. The ones we've seen, I mean, their cash flows remain, very strong. I mean, the great thing for our franchisees is if you look at over the past 3 years, I mean, their sales are up over right around 20% over the three-year period. Their performance is very good and they still feel very good about the business and the sales they're generating. Obviously, the profitability has been hit bit by the inflation last year, but still seeing them, deliver good cash flow. I think financially, our franchisees are in good shape.

In terms of, development and I'll call it the attracting new franchisees, again, good progress last year in our ability to feel good on we're working against. I mean, these things always take a little bit of time as you're bringing new franchisees in the system, but we feel like, again, we'll get some more development deals done this year on that. We feel good about how we're progressing there. Our existing franchisees are also interested. You know, we'll say I think some are maybe trying to evaluate the economic situation with a potential recession. Again, overall, the sentiment in the system is very positive about where Pollo is and the sales they're seeing and their profitability.

Drew North (Equity Research Analyst)

Thanks for all the color. I'll pass it on.

Larry Roberts (President and CEO)

Thanks.

Operator (participant)

Thank you. Our next questions come from the line of Todd Brooks with The Benchmark Company. Please proceed with your questions.

Todd Brooks (Managing Director and Senior Equity Research Analyst)

Hey, good evening, everyone. A few questions for you, if I may. First, Larry or Ira, if you look at the weather headwinds which you highlighted in the quarter and parse that out, how are the consumers that are making it into the restaurant behaving as far as how they're building checks, how they're attaching? Is third-party delivery still mixing at the same level that it was in, let's say, the second half of 2022?

Larry Roberts (President and CEO)

Third-party delivery is basically mixing about the same. It's about 7.5% to 8% of sales, which is where it was through, I think, most of last year. It's not growing. Well, it is in terms of total dollar sales, it's growing. But in terms of mix, it's been basically flat. Not seeing a decline in that. Certainly, the consumers who want their food delivered are still ordering food to be delivered.

Yeah, I think when you look at, overall customer base, as we highlighted last year, in the Q4, in our Q3 call, we are, seeing consumers react a little bit by maybe buying a little bit less, a little bit of average check, managing that down. We see that with our drink mix. Our drink mix is down from where it's been. Just again, it just looks like the lower income consumer is managing or checked down a bit by the number of items they order. Again, drink mix is down, number of items per ticket is down just slightly.

There definitely seems to be a little bit of impact there as people are, managing their budgets a little more tightly, again, amongst low income consumers. I think when you get to the kind of mid-level and higher levels, we're just not, I think they're still acting the same as they were through all of last year. Not seeing much of a difference there.

Todd Brooks (Managing Director and Senior Equity Research Analyst)

Okay, great. You spoke to more of a focus on value with the $5 and $24 price point, kind of messaging in the quarter. Value mix as a percent of the menu, have you seen that tick up as well, kind of pointing to maybe that consumer you were just referring to seeking out more value?

Larry Roberts (President and CEO)

Well, we can see the $24 family meal improve the mix on the dinner on the family meals a little bit, so we felt good about that. You know, the $5 resonating well. The overall mix is probably pretty comparable to where it was previously, so at least it's been able to sustain that mix. The one that's got us the most excited are these, $5 bowls. We went out and did some consumer screening around, okay, from a value perspective, what would consumers see as being the best value alternative that we could offer? These $5 bowls were the clear winners. The great thing about them is, we can do them at, pretty good margins and make those offerings.

That's why, we'll look at in a couple of weeks, going out and market these $5 bowls. We do think that's gonna resonate with, the lower income consumer and get them back into our restaurants as frequently as they used to be. Very excited about, getting those out there and launching those and seeing the reaction that we get from consumers.

Todd Brooks (Managing Director and Senior Equity Research Analyst)

Okay, great. A final one for me, and I'll jump back in queue. If we look at the pricing, you talked about north of 10% menu price in Q4. Where is the expectation for where Q1 menu pricing will be running year-over-year, and thoughts in this environment on further price increases as we move across the balance of fiscal 2023?

Larry Roberts (President and CEO)

For Q1, we'll be just shy of 11% pricing as we took another price increase. We took a 2.5% price increase in March. As we move forward through the year, we're going to be careful with our pricing. We're thinking about taking another moderate price increase later in the year. As we move forward through the year, you'll see our effective pricing decline as some of the higher increases we took last year. By the time we get to the end of the year, we'll be, carrying in the 4% pricing range.

Todd Brooks (Managing Director and Senior Equity Research Analyst)

Okay, great. Thanks, Ira.

Operator (participant)

Thank you. Our next question has come from the line of Matt Curtis with William Blair. Please proceed with your questions.

Matt Curtis (Equity Research Analyst)

Hi, good afternoon. Thanks for taking my question. You know, with company-owned comps outpacing the franchise comp in the Q4, I was just wondering what factors drove that. I mean, was it all really due to more normalized staffing and operating hours relative to last year? Or was it something else?

Larry Roberts (President and CEO)

Yeah. Thanks, Matt. I mean, the laps are obviously easier for company restaurants versus franchise restaurants. I mean, the franchise restaurants performed extremely well for a number of quarters on a comp sale basis. Now, I do think one of the factors driving that lap is the fact that, the company operations, as we highlighted earlier, were quite frankly not very good, going back a year ago. I think consumers did start, trading off company locations to go to franchise locations where they're getting better service. As we've made the dramatic improvements in the company operations, I think one of the factors out there is we are seeing customers returning to the company restaurants because now they're getting a better experience.

I think that is a factor. When we look at the average unit volumes in Los Angeles, where we saw a big swing when the company operations were poor, a big swing from those average unit volumes in favor of franchisees versus company restaurants, and now those have swung back quite a bit. There's the indication that, yeah, the improvement we've made in the company operations has moved the entire system up. I do think there's more consumers now coming to company locations that had previously gone to franchise locations because our company operations just weren't where they needed to be. Hats off to our company operators for the big improvements we've made.

Matt Curtis (Equity Research Analyst)

Okay, great. I guess on restaurant-level margins for this year, could you walk us through what your expectations are in terms of the cadence? I mean, can we expect it to be stronger in the second half of the year as the inflationary pressures dissipate to some degree, or do you expect something else at this point?

Larry Roberts (President and CEO)

Yeah. I think there's two things going on. I think if you just before we talk about that for a second, if you just think about it seasonally, Q2 tends to be just because of volumes, our highest margin of the year, with Q1 being the lowest, and then the back half of the year tends to be around on the average. I think this year you will see a little bit of an increase as we move to the on margins as we move to the back half of the year based on the timing of our expectations in regards to inflation.

Jake Bartlett (Managing Director and Senior Equity Research Analyst)

Okay, great. Thanks very much.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next questions come from the line of Jake Bartlett with Truist Securities. Please proceed with your questions.

Jake Bartlett (Managing Director and Senior Equity Research Analyst)

Great. Thanks for taking the question. You know, mine is about some of the costing and labor line, like overtime that seems like it's normalized and that's helping the labor margin. If I look at kind of labor per operating week, year-over-year change was much less than it had been in prior quarters. The question is, as you move into 2023, what kind of a margin tailwind do you have in the labor line that could, offset some of the wage inflation that should continue? You know, that's overtime, training, recruiting. Just trying to figure out really what kind of leverage you can get in labor, even with a little bit of wage inflation.

Larry Roberts (President and CEO)

Yeah, I mean, I'm trying to think what the precise numbers are. The bottom line is, I mean, we highlighted last year that overtime was significantly higher than, where it is on average, which we are bringing down and getting back to our more normalized levels, meaning back to where we kind of were back in 2019. You know, COVID costs are coming down because we're not having to pay people who are out on COVID leave. Meal breaks is another one. I mean, meal breaks isn't as big of a number, quite frankly, so we're getting control of those food waste. I think overtime is probably the biggest result. I'll let Ira chime in if he's got any other thoughts.

Ira Fils (CFO)

No. Yeah, I think, Larry hit it on the head. There's a lot of opportunity there. If you think about the overtime, the meal breaks, all the things we're focused on, it's half a point to a point of, favorable margin impact as we think about 2023.

Jake Bartlett (Managing Director and Senior Equity Research Analyst)

Great. That's really helpful. Then in my other question, Larry, you made a comment about kind of, potentially moving to more of a platform, approach to the menu versus six to eight LTOs. I know over the years you had been kind of moving towards platform. Maybe just remind us or me where you stand in the evolution. I mean, back historically, you had, I think it was 10, LTOs or kind of advertising windows. Where do you stand in terms of the cadence of LTOs and windows? Just maybe clarify the comment there. Are you planning on evolving that further so that it's less focused on LTOs?

Larry Roberts (President and CEO)

Well, I should clarify. You know, you're right. We got up to 10 LTOs. We're now at 6. I mean, 6 is, to me, the right number. We did 5 last year. We'll do 6 this year. I just feel like that's the right number in terms of the cadence of the timing of how often you want some new news coming. If I talk about the platforms, I mean, again, this is something that we're evolving. We've talked about in the past, but I don't think we've ever committed to it and really tested it. Like we said earlier, is we do have a menu port test going on. There are some additional, what I'll call platforms. There's an add-on menu to encourage people to trade up and buy additional items.

We're leaving quesadillas on the menu to see again how that does post-promotion. The idea is that you wouldn't go away from LTOs, but your LTOs would be more focused around actually building these platforms. I think many times in the past, we do LTOs, and then we just pull them out, and it's well, okay, but you got a bump in sales, but then you pulled it out, and it didn't really grow what I call long-term sales because it just came in and went out. What I'd like to do is see, okay, if I do a quesadilla platform, for example, and maybe it starts out a, I'll make up a number, a 4% mix.

You know, over time, if I keep coming back to quesadillas, can I get that up over time to a 5%-7% mix? I mean, it's really a lot like tostada salads. I mean, that's probably the best example of if you went back three years ago, tostadas were mixing about 8% of sales. Each year for the last three years, we've come back and talked about tostada salads. Before the current promotion, we had tostada salads up to 13%-13.5% mix on a standalone basis. Now with this recent promotion, can we get this up even higher to 14%-14.5% mix?

By having tostadas as a platform that you come and, advertise, every year, can you keep growing your sales that way versus, again, coming out with these one-time LTOs that come in, come out, and now you're back to where you were. What you're trying to do is keep growing that baseline by keep building these platforms. That's the thing we're looking at strategically, and we're testing a bit with this new menu board. That's the way I feel like we should be building sales in the company versus these, kind of relying on these one-time LTOs to beat prior year.

Jake Bartlett (Managing Director and Senior Equity Research Analyst)

Great. That's really helpful. Then my last question is on operations. I know there's a lot of moving pieces, especially as staffing has kind of, had a big impact on your efficiencies and your ability to execute. You know, given the focus over the last years of simplification, you have more initiatives kind of, underway, right now. How would you frame kind of the level of efficiency, speed of service, now versus pre-COVID? Or maybe even, now assuming a kind of normalized staffing environment. What I'm trying to get to is the model improved, versus what it was three or four years ago, materially?

Larry Roberts (President and CEO)

Yeah. I mean, if I look where drive-through times are now, I'll be honest with you, I don't have the pre-COVID numbers. You know, we've got now company drive-through times down. Total drive-through time is about 4 minutes. If you look at just, franchisees are down to 3.5 minutes. I believe, I'd have to verify this, those are probably better than where we were pre-COVID. I can't say for sure. I do know they're dramatically better from where we were, like, 1 year ago. If we look at drive-through window times, we're down to probably the best levels we've been, at least on the company side, in a long time. The franchisees continue to be a little bit better than us on that.

The only thing I'll say is when you look across all the operating metrics we look at, like I highlighted on the call, is they're all at, very high levels today. I mean, I'll just give you a couple examples. Again, it's hard for me to go back pre-COVID because I don't really have the numbers off the top of my head. If I go back a year ago, and you look at customer complaints, and again we were struggling in company operations, we were at 12 complaints per 10,000 transactions. We've cut that in half. You know, franchisees have actually come down. They were doing pretty well about, I think 5.5 or so. They're down to 3.

You know, our social media's metrics now, our franchisees are at 4, and we're getting close on the company side to 4, and that's Yelp and Google reviews, number of stars. And those are, again, I believe the best I've seen in a long time. Again, I think the system as a whole has made tremendous progress on operations. The franchisees, despite the fact they were already operating well at high levels a year ago, have made even more improvements, and the company has made dramatic improvements. Apologies for not knowing what the 2019 numbers were, but if I go back over the last year and look at the improvements we've made, they're huge.

I'm pretty sure that a number of things we're looking at are equal to, if not better than where we were in 2019.

Jake Bartlett (Managing Director and Senior Equity Research Analyst)

Great. No, that's really helpful. I appreciate it.

Operator (participant)

Thank you. Our next question comes from the line of Todd Brooks with The Benchmark Company. Please proceed with your questions.

Todd Brooks (Managing Director and Senior Equity Research Analyst)

Hey, thanks. Just one quick follow-up here or question. Obviously you're accelerating the remodel activity in 2023 after getting a little over 20 done last year. Can you share with us what we or investors should be expecting out of remodels? What's the early experience been? Are we seeing it in kind of operational performance at the store? Are we seeing it in a revenue lift? How should we think about accelerating remodel activity as a potential tailwind for the business? Thanks.

Larry Roberts (President and CEO)

Yeah. I mean, in general, I think we said, you know, we should be seeing sales lifts of the 3%-5% range on these remodels. I mean, that's the expectations with the high end being really what we're targeting, the 5%. You know, with COVID and things, it's been a mixed bag. Overall, we're kind of in that range of what we're seeing. We're getting very positive feedback from franchisees on the remodel. You know, positive feedback from consumers. In the end, somewhere in that 3%-5% lift is what, and when I say 3%-5%, that's versus a, control group, is what we should be seeing in these remodels.

Todd Brooks (Managing Director and Senior Equity Research Analyst)

Has the cost of the remodels, has that tightened up as you've gone through this first wave? What should we think about there for the cost of rolling out this next wave?

Larry Roberts (President and CEO)

Yeah. I think we're still seeing it. It varies depending on what level of remodel we do. You know, we have 3 different levels. What we're seeing is we're doing more of, I'll call it, I'll call it Level 1, which is a lower level remodel, which includes a full, a full external remodel. Internally, some of the things like flooring and things, we may not change out, but still get other elements in there. That's still running, probably $250-$300. Your kind of mid-levels, like $350. If you go to high level, you're looking probably more the $400-$450 range, maybe even $500. I think most of the remodels now are really Level 1 and Level 2.

Todd Brooks (Managing Director and Senior Equity Research Analyst)

Okay, perfect. Thanks, Larry.

Larry Roberts (President and CEO)

Yep.

Operator (participant)

Ladies and gentlemen, we have reached the end of today's question and answer session. I would now like to turn the call back over to Mr. Larry Roberts for closing remarks.

Larry Roberts (President and CEO)

Okay. Well, I just wanna thank everybody for joining us tonight. Hope you have a great night. Hope you're as excited about El Pollo Loco as we are. Thanks very much.

Operator (participant)

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.